On September 07, 2023, PG&E Corp (PCG, Financial) reported a daily gain of 2.28% and a 3-month loss of -2.48%, with an Earnings Per Share (EPS) (EPS) of 0.91. However, the question remains: is the stock significantly overvalued? This article aims to provide an in-depth analysis of PG&E's valuation, offering insights to potential investors. Read on for a comprehensive examination.
PG&E is a holding company whose primary subsidiary, Pacific Gas and Electric, is a regulated utility operating in Central and Northern California. The company serves 5.3 million electricity customers and 4.6 million gas customers across 47 of the state's 58 counties. With a market cap of $42.10 billion and a stock price of $16.83 per share, PG&E's valuation appears significantly overvalued compared to its fair value (GF Value) of $12.36.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value that the stock should ideally be traded at. If the stock price significantly exceeds the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Financial Strength of PG&E
It is crucial to assess a company's financial strength before investing in its stock. Companies with poor financial strength pose a higher risk of permanent loss. A good indicator of financial strength is the cash-to-debt ratio. Unfortunately, PG&E's cash-to-debt ratio of 0.01 is worse than 95.2% of 479 companies in the Utilities - Regulated industry. This poor financial strength score of 3 out of 10 indicates that PG&E's financial health is less than ideal.
Profitability and Growth of PG&E
Investing in profitable companies carries less risk, especially if the company has demonstrated consistent profitability over the long term. PG&E has been profitable 6 years over the past 10 years. However, its profitability ranks as fair, with an operating margin of 9.35%, worse than 57.26% of 496 companies in the Utilities - Regulated industry.
One crucial factor in a company's valuation is its growth. Companies that grow faster create more value for shareholders, especially if the growth is profitable. Unfortunately, PG&E's average annual revenue growth of -32.1% ranks worse than 98.54% of 480 companies in the Utilities - Regulated industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) is another method to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. PG&E's ROIC is 7.59, while its WACC is 6.25, indicating a positive value creation.
In conclusion, PG&E (PCG, Financial) appears to be significantly overvalued. While the company's financial condition is poor, its profitability is fair. However, its growth ranks worse than 0% of 457 companies in the Utilities - Regulated industry. For more information about PG&E stock, you can check out its 30-Year Financials here.
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